Monday, September 28, 2015

The Cost of Uncertainty about the Timing of Social Security Reform by Frank N. Caliendo, Aspen Gorry, Sita Slavov - #21585 (AG PE)

Abstract:

We develop a model to study optimal decision making in the face of uncertainty about the timing and structure of a future event. The model is used to study optimal decision making and welfare when individuals face uncertainty about when and how Social Security will be reformed. When individuals save optimally for retirement, the welfare cost of uncertainty about the timing and structure of reform is just a few basis points of total lifetime consumption. In contrast, the cost of reform uncertainty can be greater than 1% of total lifetime consumption for individuals who do not save.

The 2015 Technical Panel on Assumptions and Methods, which was appointed by the Social Security Advisory Board, has released its report. The report covers a range of issues, both in terms of assumptions and methods and how the results of the Trustees and SSA actuaries’ calculations should be presented to the public. However, the table below summarizes the results of the main assumption changes the panel recommended to the Social Security Trustees. If all were adopted, Social Security’s long-term funding shortfall would rise from 2.68% of taxable payroll to 3.42%.

Tuesday, September 15, 2015

Social Security Disability Insurance Program Is Financially Unsustainable

“The 2015 annual report from the Social Security Board of Trustees shows that the program’s disability component is in immediate trouble. Data from the latest report show that the disability fund will be depleted as soon as next year and unable to pay full benefits to beneficiaries.”

The Financial Feasibility of Delaying Social Security: Evidence from Administrative Tax Data

NBER Working Paper No. 21544Issued in September 2015NBER Program(s): AGPE

Despite the large and growing returns to deferring Social Security benefits, most individuals claim Social Security before the full retirement age, currently age 66. In this paper, we use a panel of administrative tax data on likely primary earners to explore some potential hypotheses of why individuals fail to delay claiming Social Security, including liquidity constraints and private information regarding one’s expected future lifetime.

We find that approximately 31-34% of beneficiaries who claim prior to the full retirement age have assets in Individual Retirement Accounts (IRAs) that would fund at least 2 additional years of Social Security benefits, and 24-26% could fund at least 4 years of Social Security deferral with IRA assets alone. Our analysis suggests that these percentages would be considerably higher if other assets were taken into account. We find evidence that those who claim prior to the full retirement age have higher subjective and actual mortality rates than those who claim later, suggesting that private information about expected future lifetimes may influence claiming behavior.

Default features in defined-contribution plans are designed to improve the retirement security of plan participants. To date, these have focused on the challenge of saving, ignoring the more complex challenge of dissaving. Automatic default provisions for drawing down participant account balances after retirement could be beneficial. Conceptually, the objective is to reframe the Zeitgeist of defined-contribution plans from that of savings plans closer to that of income continuation plans with pension-like features. This could be accommodated though a managed payout feature designed into the plan’s default investment strategy.

This paper uses administrative data on all active employees of the Federal Reserve System to examine participation in and contributions to the Thrift Saving Plan, the system’s defined contribution (DC) plan. We have appended to the administrative records a unique employee survey of economic/demographic factors including a set of financial literacy questions. Not surprisingly, Federal Reserve employees are more financially literate than the general population; furthermore, the most financially savvy are also most likely to participate in and contribute the most to their plan. Sophisticated workers contribute three percentage points more of their earnings to the DC plan than do the less knowledgeable, and they hold more equity in their pension accounts. Finally, we examine changes in employee plan behavior a year after the financial literacy survey and compare it to the baseline. We find that employees who completed an educational module were more likely to start contributing and less likely to have stopped contributing to the DC plan post-survey.

This paper develops a theory of the two-armed intergenerational welfare state, consistent with key features of modern welfare arrangements, and uses it to rationalise the rise and fall in generosity of pay-as-you-go pensions solely on efficiency grounds. By using the education arm, a dynamically-efficient welfare state is shown to improve upon long-run laissez faire even when market failures are absent. To release these downstream welfare gains without hurting any transitional generation, help from the pension arm is needed. In the presence of an intergenerational education externality, pensions initially rise in generosity but can be replaced by fully funded pensions eventually.

Lack of financial sophistication has been suggested as a cause of retirement plan failure. We extend previous studies of retirement adequacy by testing the effect of financial sophistication proxies on projected retirement adequacy, using the 2010 Survey of Consumer Finances (SCF) dataset. We found that only 44% of households with a fulltime head aged 35 to 60 are adequately prepared for retirement in 2010, compared to 58% in 2007. Our multivariate analysis shows that college educated households are more likely to have an adequate retirement than those with less than a high school degree. Households using a financial planner are more likely to have an adequate retirement than those that do not use one.

Wednesday, September 9, 2015

The Bipartisan Policy Center convened the Disability Insurance Working Group in 2014. The group includes individuals from across the ideological spectrum with a variety of backgrounds and viewpoints, including academics, policy researchers, advocates for people with disabilities, representatives of the labor and business communities, and former congressional and agency staff. Working group members share an urgent concern to address the impending exhaustion of the Disability Insurance Trust Fund and to improve the Social Security Disability Insurance (SSDI) program to better meet the needs of Americans with disabilities. There is shared recognition that a bipartisan approach will be necessary and that there are ways in which the program could be improved. While many members of the group would not endorse every provision herein on a stand-alone basis, they have agreed to support the complete package.

The Committee for a Responsible Federal Budget has a blog post taking on a recent New York Times column from Teresa Tritch on how to address the funding problems of the Social Security Disability Insurance program.

You can read Tritch’s original piece here, then CRFB’s response here. Have at it.

Friday, September 4, 2015

17th Annual RRC Conference

Dayanand Manoli, University of Texas at Austin, and Andrea Weber, University of Mannheim The Effects of Increasing the Early Retirement Age on Employment of Older Workers Summary Slides

Alicia H. Munnell, Geoffrey Sanzenbacher, and Matthew Rutledge, Boston College What Causes Workers to Retire Before They Plan? Analyzing the Relative Importance of Health, Financial,Familial, and Employment Shocks SummarySlides

Theodore Figinski, Department of the Treasury, and David Neumark, University of California, Irvine Does Eliminating the Earnings Test Increase Old-Age Poverty of Women? Summary SlidesDiscussant: Howard Iams, Social Security Administration Slides

Eric French, University College London; Hans-Martin von Gaudecker, University of Bonn; and John Bailey Jones, State University of New York at Albany The Effect of the Affordable Care Act on the Labor Supply, Savings, and Social Security of Older Americans SummarySlides

Lauren Schmitz, The New School Do Working Conditions at Older Ages Shape the Health Gradient? SummarySlidesDiscussant: Barbara Bovbjerg, Government Accountability Office Slides

Padmaja Ayyagari and David Frisvold, University of Iowa The Impact of Social Security Income on Cognitive Function at Older Ages SummarySlides

Panel 4: IMMIGRATION

George Borjas, Harvard University The Labor Supply of Undocumented Immigrants: Towards an Assessment of the Impact of Status Regularization SummarySlidesDiscussant: Stephen Goss, Social Security Administration Slides

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.